The Apartment Sector Begins to Feel the Pinch

In a year in which the economy was hit by bad news on a number of fronts, the commercial real estate sector reacted with a negative performance in major property sectors. Even the apartment sector, which received a boost from troubles in the housing market, was not spared.

In the fourth quarter of 2008, apartment, office and retail properties nationwide all experienced a rise in vacancy rates and a decline in effective rents, according to research firm Reis. These property types also saw more space coming on the market than was absorbed, making for negative net absorption of space.

In the apartment sector, even after accounting for the positive effect of a downturn in homeownership and buyers sitting on the sidelines, the vacancy rate rose 40 basis points to 6.6% in the fourth quarter.

Effective rent in the sector was down 0.4% in the fourth quarter. Asking and effective rents for apartment properties have both turned negative in the fourth quarter for the first time since the first quarter of 2002.

“Landlords are lowering the amount of asking rent as well as increasing the level of concessions they are willing to provide in an attempt to prop up occupancy levels,” says Victor Calanog, Reis director of research.

The office sector saw a national vacancy rate of 14.4% in the fourth quarter, a 70 basis point increase from the third quarter. This represents the largest quarterly jump in the office vacancy rate since the first quarter of 2002. At its lowest point in this cycle, the national office vacancy rate was at 12.5% in the third quarter of 2007.

“The upward trend in the national [office] vacancy rate is expected to continue into 2009 and may spill over into 2010 as large financial services firms, among others, find a new equilibrium both in terms of employment levels as well as ownership structure, given the ongoing wave of mergers and acquisitions,” says Calanog.

Effective rents in the office sector were down 1.2% in the fourth quarter. For 2008, effective rents were up a mere 0.9%.

And as consumer confidence declined to new lows in 2008 and consumers cut down on discretionary spending, the retail sector, too, was hard hit by recession. Neighborhood and community shopping center properties saw vacancy rates gain 50 basis points and rise to 8.9% at the end of the fourth quarter from third quarter levels, the largest quarterly rise in vacancy since 1999, according to Reis.

Taking into account regional malls, the vacancy rate rose 50 basis points as well to 7.1%, the highest vacancy rate since Reis began tracking regional malls in 2000. Effective rents on neighborhood and community retail properties were down 0.9% in the fourth quarter, while regional malls saw a decline of about 0.3% in effective rents.